Grassley yes, Harkin no as Senate approves JOBS Act

Yesterday the U.S. Senate approved an amended version of the Jumpstart Our Business Startups (JOBS) Act, which is supposed to make it easier for entrepreneurs to start small companies. All five Iowans in the U.S. House voted for this bill two weeks ago, but Iowa’s senators split on party lines.

[Senate Majority Leader Harry] Reid’s second in command, Durbin, however, immediately met the bill on the Senate floor last week with resistance, arguing it would reverse many of the hard-won reforms represented in the Dodd-Frank regulatory reform legislation and other reforms implemented in the wake of the 2008 financial crisis.

“The bill’s supporters have characterized it as a jobs bill, but this bill is really designed to change disclosure, accounting and auditing standards and to exempt many firms and corporations from the Securities and Exchange Commission oversight,” he said.

Senators, throughout the week, swatted away several Democrat proposed amendments that would have “repaired and replaced” the underlying legislation. Prior to final passage on Thursday, however, the Senate voted to adopt an amendment proposed by Sen. Jeff Merkley (D-Ore.) that would create stricter reporting requirements and regulations for companies that raise cash through “crowd funding” over the Internet.

The purpose of the amendment is “to create a solid foundation for Americans to be able to invest in start up companies throughout the Internet and do so in a way that does not result in predatory scams,” Merkley said prior to the 64-35 adoption.

Both Grassley and Harkin voted for Merkley’s amendment. My guess is that provision won’t be a deal-breaker for House Republican leaders, who seem eager to get at least one of their “jobs bills” to the president’s desk.

UPDATE: Harkin argued in a Senate floor statement on March 20 that the JOBS bill “repeats deregulation mistakes of the past.”

Following is the full text of Harkin’s remarks, as prepared for delivery:

“Mr. President, I’ve come to the floor today to express my strong disappointment with the so-called “small business” legislation passed by the House of Representatives, and to express my support for the substitute amendment offered by Senators Reed, Levin, Landrieu and others, of which I am a cosponsor.

“Quite simply, there is a right way and a wrong way to address some legitimate concerns about the ability for small business to access capital. Unfortunately, the House bill is completely the wrong approach. In the name of helping small business, the bill takes a meat axe to the very investor protection laws that have allowed our capital markets to flourish.

“Mr. President, on Sunday March 11, the New York Times published an editorial about the House bill titled “They Have Very Short Memories.” This title could not be any more appropriate, because in the wake of the dotcom bubble, the Enron corporate accounting scandal, and the 2008 financial crisis, advocates of this bill must have very short memories indeed.

“The idea that this is the right time to further weaken regulations on Wall Street is unconscionable. As we are continuing to dig out of the worst financial crisis since the Great Depression, which has brought so much pain to hardworking middle class families, the idea that the solution to what ails our economy is to further deregulate the financial sector and open up the door for fraud and abuse simply makes no sense.

“In fact, according to a recent report from the Center on Retirement Security at Boston College, financial scams against seniors, enabled by the internet, are already on the rise. For this reason, AARP wrote that their “primary concern is that these bills…inadequately protect against the potential harmful impact on investor protections and market integrity.”

“Even more, the North American Securities Administrators Association, the organization of state securities regulators, said of the House passed legislation: “by placing unnecessary limits on the ability of state securities regulators to protect retail investors from the risks associated with smaller, speculative, investments, Congress is poised to enact policies intended to strengthen the economy that will likely have precisely the opposite effect.”

“And, supporting that view, the AFL-CIO wrote to Congress that “while the proponents of the “capital formation” bills claim they would promote jobs…they would actually have the perverse effect of raising the cost of capital for all companies by increasing the risk of fraud.”

“Mr. President passing the House bill would be a mistake.

“I remember the last time we rushed to deregulate the financial sector in the name of creating jobs. I was here in the Senate then. It was in the late 1990s when we passed a bill to repeal Glass-Steagall. By allowing investment banks, commercial banks, and insurance companies to merge, Congress fostered the creation of financial behemoths like Citigroup and AIG, whose reckless and irresponsible risk taking plunged the global economy into the worst financial crisis in generations.

“I am proud to remind my colleagues that I was one of eight Senators that did not vote for that legislation. Despite the conventional wisdom telling us to do otherwise, only a few of us correctly believed that the risks of further deregulating Wall Street were too great.

“I bring this up, Mr. President, because Simon Johnson, the former Chief Economist at the IMF, recently wrote that: “with the so-called JOBS bill, Congress is about to make the same kind of mistake again [as the repeal of the Glass-Steagall Act].”

“I urge my colleagues to take these words seriously. Unless we do this in the right way, future members of the Senate will be standing right here lamenting the lack of foresight in this Congress.

“Fortunately, Mr. President, there is an alternative way to make the reforms that are necessary to allow small business to grow without jeopardizing our financial markets and hurting consumers. As SEC Chairwoman Mary Shapiro wrote in a March 13 letter to Senators Johnson and Shelby, “I believe that there are provisions that should be added or modified to improve investor protections that are worthy of the Senate’s consideration.”

“The substitute amendment offered by Senators Reed-Levin-Landrieu includes these important reform provisions. Let me list a few things that the substitute amendment would do:

• The House bill would allow companies to advertise risky, less-regulated, unregistered private offerings to the general public using billboards along the highway, cold calls to senior living centers or other mass marketing methods. The Reed-Landrieu-Levin amendment would allow firms to advertise and sell such offerings only to investors with appropriate resources and sophistication to bear the risks.

• The House bill would tear down protections put in place after the late 1990s internet stock bubble burst that prevented conflicts of interest from tainting the quality of research about companies. The Reed-Landrieu-Levin amendment would continue the protections that make sure that research used to advise investors is not tainted by conflicts of interest.

• The House bill would allow very large companies, with up to $1 billion in revenues per year, to offer stock to the public and yet avoid financial transparency and auditing requirements designed to ensure they’re not cooking the books. The Reed-Landrieu-Levin amendment would ensure that essential investor protections apply to large companies by lowering the exemptions to companies with less than $350 million in revenues.

• The House bill would allow unregulated websites to peddle stocks to ordinary investors without any meaningful oversight or liability, which could give rise to fraud, money laundering, and other risks. The Reed-Landrieu-Levin amendment would protect the integrity of these markets by ensuring that these website intermediaries are subject to appropriate levels of oversight.

• The House bill would allow extremely large companies, with tens of thousands of shareholders, to evade SEC oversight. The Reed-Landrieu-Levin amendment would ensure that banks and other large companies, with lots of shareholders, are subject to basic transparency, integrity, and accountability protections.

“In sum, Mr. President, the substitute amendment is vastly better than the House-passed legislation. It protects investors. It protects consumers. It protects our capital markets. And, it allows small business to grow.

“So, Mr. President, let’s heed the lesson of the last decade and take a step back before rushing to deregulate our economy even further. Previous acts of Congress to deregulate our markets in the hope of spurring economic growth may have helped the big banks on Wall Street, but for the rest of us resulted in the worst economic crisis in generations.

“I urge my colleagues to oppose the House measure and support the substitute amendment when it comes to the floor for a vote.”

Yesterday, Grassley was one of just three senators to oppose cloture, because Reid opted to bring the weaker House version of the STOCK Act before the Senate, rather than demanding a conference committee work out differences between the two bills. I agree with Grassley that Reid should have stood behind the language approved by the Senate.

I enclose below an e-mail blast and press release explaining Grassley’s position on the bill.

This week, the majority leader of the United States Senate used his power to shut out my effort to require political intelligence agents to register, as lobbyists do. At a growing rate, political intelligence professionals collect information from Congress and federal agencies and sell the information to Wall Street firms. The firms use the information to buy and sell stocks and presumably profit. My proposal is focused on the people who make their living gathering information and selling it to Wall Street. It specifically exempts reporters from any disclosure requirements. A Washington Post news story this week said the political intelligence amendment, combined with an enhanced prosecution amendment by Senator Patrick Leahy, which also was dropped, “transformed the (insider trading) bill into the most sweeping ethics legislation Congress had considered since 2007.”

The decision to scrap a requirement for registration by political intelligence professionals is a blow for good government and transparency. It’s a victory for Wall Street and a defeat for the American people. It’s a victory for those who prefer the secrecy of the status quo. The reform had the support of 60 senators in a vote earlier this year, and the original House bill has 286 co-sponsors. So, even though political intelligence registration got left out of this bill, I’ll keep looking for ways to bring it back.

March 22 press release, including Grassley’s statement on the Senate floor:

Please note: Several news accounts are describing Sen. Grassley’s vote as against the anti-congressional insider trading bill, the Stop Trading on Congressional Knowledge, or STOCK Act. Here’s an explanation of the vote:

Sen. Grassley voted against cloture on the STOCK Act, not against the STOCK Act itself. There was a unanimous consent agreement that if cloture were invoked, the bill would be adopted. That obviated the need for a roll call vote on final passage of the STOCK Act. Sen. Grassley supports the STOCK Act. He voted against cloture to proceed to the STOCK Act because the Senate leadership stripped out his political intelligence registration provision, and he wanted the opportunity to offer his amendment.

On Tuesday the Republican Majority Leader of the House and the Democrat Majority Leader of the Senate worked together to thwart the will of 60 Senators and 286 Members of Congress.

This is not the kind of bipartisan cooperation we need.

I won’t ascribe motives to anyone in this body, but I know that today’s actions only serve the desires of obscure and powerful Wall Street interests and undercut the will of an overwhelming majority of Congress.

They took a common sense provision supported by a majority of both Houses of Congress – and they simply erased it.

The provision simply says that if you seek information from Congress or the executive branch to trade stocks – Congress, the executive branch, and the American people ought to know who you are.

But, the leadership of both parties went behind closed doors, and they made that provision magically disappear.

What they did was a truly amazing procedural sleight of hand.

First, the Majority Leader in the House said that the definition of political intelligence was so “vague” that he couldn’t possibly figure out how to define it.

That’s the excuse given for stripping any regulation of it from the STOCK Act. To me, that came as something of a surprise.

I would like to read Section 7 part b of the version of the STOCK Act that was rammed through the House of Representatives:

“Definition – for purposes of this section, the term ‘political intelligence’ shall mean information that is derived by a person from direct communications with an executive branch employee, a Member of Congress, or an employee of Congress; and provided in exchange for financial compensation to a client who intends, and who is known to intend, to use the information to inform investment decisions.”

That seems pretty straightforward, doesn’t it?

Of course, now that definition will only be applied to a study, not to legislation with any real teeth.

If you think that’s bad, this is what happened to the STOCK Act in the Senate.

By now I think just about everybody in this body knows how passionately I feel about this amendment.

I have spoken repeatedly about the dangers of unregulated political espionage.

I have reached out to leadership to express my concern and written a letter with Senator Leahy on the importance of our STOCK Act provisions.

I said that I was willing to negotiate on the language of my provision.

What was the response?

Nothing.

I wasn’t even given the courtesy of being notified before cloture was filed.

It was an ambush, plain and simple.

Just like those people who traffic in political espionage, this process has been cloaked in secrecy.

Now the claim is made that the Senate was forced to take up the House bill, because an unnamed Republican was threatening to object to a conference.

However, no Republican, or any Senator for that matter, has publically owned-up to trying to stop this bill from going to conference.

But, even if we accept this fact, there are still more questions.

Supposedly, we are taking up the House bill because the Senate does not have time to take two more cloture votes.

Throughout this Congress, we have spent weeks in nothing but quorum calls but suddenly, we have run out of time.

Of course, in less than ten days, we will be leaving Washington, D.C., for a two week recess.

Here is an idea. With congressional approval ratings in the near single digits why can’t we spend part of that recess getting the STOCK Act right.

The Washington Post said that my amendment, combined with Senator Leahy’s political corruption amendment, “transformed the (STOCK Act) into the most sweeping ethics legislation Congress had considered since 2007.”

Isn’t that worth taking two extra votes?

I think so, but apparently others disagree.

At the end of the day, here is what will happen.

There are over 2,000 people working in the completely unregulated world of political intelligence, or political espionage as I call it. Right now, they are celebrating.

They are celebrating because they know that its business as usual.

They can continue to pass along tips they get from Members of Congress, Senators and staff and no one will be the wiser.

They pass along these tips to hedge funds, private equity firms and other investors who pay them top dollar.

The lobbyists get rich.

Wall Street traders get rich.

But the American people lose.

That is the tragic result of the Majority Leader’s decision.

Through my oversight investigations, I have learned that political intelligence gathering for Wall Street is growing field, ripe for abuse.

Here are just two examples of the type of activity that will continue to be kept in the dark.

In the course of my investigation of a whistleblower’s claims, I learned that the Center for Medicare and Medicaid Services (CMS) has closed door meetings with Wall Street firms where CMS policies are discussed.

No record is kept of these meetings and employees are essentially on the honor system to make sure that they are not giving investors inside information.

As an example, the whistleblower who came to us claimed that over a dozen CMS employees spent nearly two hours briefing Wall Street analysts and investors on the taxpayer’s dime.

A member of the public could not walk in and get that kind of access to information.

CMS is supposed to be working for us, but instead, we found out that they were working for Wall Street.

If my amendment fails we won’t know how many of these meetings occur throughout the government and who profits from these meetings.

Another example was an investigation I conducted into the Obama Administration’s Department of Education.

The Department of Education was getting set to issue regulations on gainful employment that would affect for-profit colleges.

Several hedge funds had bet big that those new regulations would make it harder for for-profit colleges to do business.

Then, news began to leak out that those regulations were not going to be as tough as was expected.

Suddenly, for-profit stocks began to rise and those hedge fund investors reached out to their friends in the Department of Education.

This is from an actual e-mail that my investigation uncovered.

It was sent from Steve Eisman, a hedge fund investor to David Bergeron, he was part of the team in charge of writing these regulations.

The e-mail reads: “I know you cannot respond, but FYI education stocks are running because people are hearing DOE is backing down on gainful employment.”

To translate, on Wall Street, the term “running” means that a stock is going up.

Within minutes this e-mail was marked high importance and forwarded to senior level political appointees. These appointees included James Kvaal, the Deputy Undersecretary and another policy expert at the Department and Phil Martin, the Secretary of Education’s confidential assistant.

To this day we do not know why the Department’s higher education policy experts needed to know that a hedge fund investor was losing money.

What we do know is that for-profit stocks dropped significantly and if you bet big that these stocks would drop, you likely made a lot of money.

When the Department of Education answered my questions, they admitted to my staff that this e-mail was not a proper contact.

In addition, the Department of Education’s Inspector General is investigating the gainful employment rulemaking process.

These are just two examples in two government agencies but reports like this are just the tip of the iceberg.

The more power Washington, DC has, the more it affects financial markets.

And the more it affects financial markets, the more people on Wall Street want to pay for information about what is going to happen in Washington, DC.

Usually, the only way any sort of ethics reform gets done around here is that someone gets caught.

With political intelligence we have the opportunity to create transparency before the next scandal happens.

As government grows, this industry is going to grow along with the potential for corruption.

The question is – what are we going to do about it?

Transparency is the simplest and least intrusive solution.

We can commission another study and kick the can down the road for another year or we can act.

This is our last chance to make sure that the Senate speaks with a unified voice against secrecy for political intelligence agents and for transparent government.

We must not allow special interests to operate in darkness.

For these reasons, and to support transparency, open government, and good government, I will oppose cloture on this bill.

If cloture is invoked, which is likely, I intend to vote for the bill. Although very flawed, at least it’s better than current law. But, it’s not much of a victory for the American people.